Role of RBI as Banker & Debt Manager to the Government

In 1935, Reserve Bank of India, on its inception became the Banker and Debt Manager to the Government and this is a very important function. As per the Reserve Bank of India Act 1934, the Central Government entrusts the Reserve Bank with all its money, remittance, exchange and banking transactions in India and the management of its public debt. The Government also deposits its cash balances with the Reserve Bank.

In 1944, the Public Debt Act was passed and this act replaced the Indian Securities Act, 1920. Via this act RBI’s functions and powers with respect to management of Central public debt were increased. This act was replaced in 2007 with Government Securities Act.

However, Reserve Bank may also act as the banker to a State Governments. This is by an Agreement. Currently, the Reserve Bank acts as banker to all the State Governments in India, except Jammu & Kashmir and Sikkim. It has limited agreements for the management of the public debt of these two State Governments.

Central Government is required to maintain a minimum cash balance with the Reserve Bank. Currently, this amount is Rs.10 crore on a daily basis and Rs.100 crore on Fridays, as also at the end of March and July. These provisions are as per the administrative arrangements (not as per any legislation).

For Central Government

As per the RBI Act, 1934, Central Government entrusts the Reserve Bank with all its money, remittance, exchange and banking transactions in India and the management of its public debt. The Government also deposits its cash balances with the Reserve Bank. Further, note that the central government is required to maintain a minimum cash balance with the Reserve Bank. Currently, this amount is Rs. 10 crore on a daily basis and Rs.100 crore on Fridays, as also at the end of March and July. These provisions are as per the administrative arrangements (not as per any legislation).

For state governments

In case of state governments, RBI works has their banker only when a particular state enters into such agreement with RBI. Currently, the Reserve Bank acts as banker to all the State Governments in India, except Jammu & Kashmir and Sikkim. It has limited agreements for the management of the public debt of these two State Governments.

Banking of Individual Ministries

RBI used to handle banking of individual ministries in past. Currently, every ministry has been given a public sector bank to manage its operations. But still RBI functions for the ministries for which it is nominated to do so.

Central Accounts Section

Reserve Bank of India maintains the Principal Accounts of Central as well as State Governments at its Central Accounts Section, Nagpur. It has put in place a well structured arrangement for revenue collection as well as payments on behalf of Government across the country. A network comprising the Public Accounts Departments of RBI and branches of Agency Banks appointed under Section 45 of the RBI Act carry out the Govt. transactions.

Banks that conduct Government Business in India

At present all the public sector banks and three private sector banks viz. ICICI Bank Ltd., HDFC Bank Ltd. and Axis Bank Ltd. act as RBI’s agents. Only authorized branches of Agency banks can conduct Govt. business.

RBI works as Debt Manager of Government

RBI helps both the central government and state governments to manage their public debt, float new loans, issue and retirement of rupee loans, interest payment on the loan and operational matters about debt certificates and their registration. RBI’s debt management policy aims at minimizing the cost of borrowing, reducing the roll-over risk, smoothening the maturity structure of debt, and improving depth and liquidity of Government securities markets by developing an active secondary market.

Ways and means advances (WMA)

Whenever there is a temporary mismatch in the cash flow of the receipts and payments of the State Governments, RBI provides them Ways and Means Advances (WMA). This also comes under debt management works of RBI.